Analytics, A Game-Changer for Mid-Market Private Equity firms

Posted by | Alok Tayal

Private Equity (PE) firms primarily focus on these three parameters. First, to understand the target firm’s true worth through the due diligence process; second, to find sustainable systems to drive significant value creation post-investment; and third, to find the right time and suitable structure for an exit. A PE firm’s success can only be measured by the opportunities it uncovers and how it gets ahead of challenges in managing the firm.

So far, PE firms have used networking, deals, and industry experience to deploy dry powder while creating long-term value. But, rising valuations and the constantly evolving nature of the market/sector mean that a data-fueled -analytics approach is needed to drive growth, increase market share, build a partnership with customers and enhance operational efficiency for its portfolio firms. Today, integrated access to better quality, better-analyzed, better-visualized data across marketing, sales, procurement, customer interaction, brand, social media, and industry is uncovering new sources of revenues, improving sales, bettering bottom lines, and enabling more fruitful relationships with existing customers and partners.

Private equity investors are increasingly eyeing deals hidden in the lower middle market. These firms are valued between 10-100 million. Mid-market PE firms are pursuing strong founder-led or family-owned companies. Most of these firms have not seen market-led funding in their current life span, and in some cases, entire operations revolve around founders and a few early-stage loyal employees. As a result, the business runs primarily on experience, gut, and relationships and less on structured data and analysis.

Challenges for Mid-Market PE firms

Once acquired, Mid-market PE has the challenge of finding talent that can help identify and develop valuable data sources and a PE mindset that aligns with their exit goals of 3-6 years. Another added complexity is the measured investment approach needed for the mid-market segment. PE firms can’t suddenly spend millions of dollars on analytics and hope for results to match their disinvestment timings. The key here is to find the most pressing business issues and resolve them through the practical and prioritized applications of analytics, rather than trying to take on all challenges at once and execute a plan that will take enormous resources, attention, and time to deliver results.

How Can Analytics Help Them?

An external agency with experience working with mid-market PE and their portfolio firms can significantly help. For example, when a PE firm called us to help look at a sales problem, our consultants and data scientists quickly developed trustworthy data sources. Using data models, insights, and analytics, we discovered pricing, contracting, and to some extent, customer service issues.

At Fuld & Company, we advise our clients and provide consultation on implementing the fixes/changes. As a result, the average revenue realization per client from existing clients went up by 160% in year 1 and 220% in year 2. In addition, new client realization for their first year went up by 70%. Fixes were simple, and the process from discovery to implementation took about five months. The magic was an effective use of the information already created in the business but lying in a manner where it was not cleaned/updated, making trust issues and hence not valued. In another example, we discovered sales growth issue was the ineffective use of their channels and resources. It required some internal staff training, shifting their focus to the most productive sales channel, helping them quickly and scientifically identify 20% of leads/deals, giving them 90% of revenue, and freeing them up to be much more productive and efficient. This six-month process enhanced annualized sales by about 22%, with the same workforce, contributing significantly to the bottom line. It was pure satisfaction and joy when a fortune firm acquired them, giving our PE client and business owners several times of ROI over less than five years.

While data analytics and approaches and tools are available to funds, management must understand how to use them pragmatically. For mid-size firms, the success mantra is to start with 1-2 critical business problems and resolve them relatively short to keep people motivated, investment restrained, and success delivered in a visible and quantifiable manner to keep valuation goal post moving forward. Interestingly, data techniques have a ball-rolling impact; the more we implement them, the more we discover new opportunities to apply them within the same firm and other portfolio firms.

To learn more about our data analytics services please visit here or contact us at Fuld & Company – Delivering Competitive Intelligence

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Tags: Customer Analytics, Data analytics, Emerging Markets, Equity and M&A Research, private equity